The news: A potential conflict between Russia and Ukraine could impede the supply of neon and palladium, two critical components of chip manufacturing.

Why it’s worth watching: The White House has been urging chipmakers to develop workarounds to material disruption resulting from the political tensions between Russia and Ukraine, per Protocol. 

• Factories use neon from Ukraine for laser gases in lithography, and companies use palladium from Russia for chip packaging and developing sensors and memory.
• 90% of US semiconductor-grade neon comes from Ukraine, while 35% of US palladium is sourced from Russia, per Techcet.
• The Semiconductor Industry Association (SIA) has asked members about their access to materials sourced from the region.

The problem: The Russia-Ukraine conflict can intensify at any time. “We continue to see signs of Russian escalation, including new forces arriving at the Ukrainian border,” Jake Sullivan, the president’s national security adviser, told The New York Times.

• Material disruptions are sure to follow any military action, with no guarantee of when supply would resume. 
• Beyond material shortages and subsequent factory closures, a Russian invasion of Ukraine is expected to disrupt global financial markets and result in economic sanctions against Russia, leading to further shortages.
• Delivery times for chips increased to 25.8 weeks in December, an all-time high, per the Susquehanna Financial Group.

What’s next: Shortages and trade embargoes are common results of political conflict, which some countries can use as leverage during negotiations. In the case of Russia and Ukraine, a neon and palladium shortage will put pressure on a prolonged global chip crisis. 

While chipmakers are being warned to look for alternative sources of neon and palladium, this will likely be near impossible given the volume of production coming from the region.